Host Mary Walden asks about a savings account called My RA that President Obama proposed in his State of the Union Address. Her husband, N.C. State University economist Mike Walden answers the question: What is it and how is it different from existing savings accounts?”
Mike Walden: “Well, I think the President was motivated by the fact that new data show that over half of households are really not saving for their retirement. So, this is a new vehicle that I think is targeted toward low income and middle income people who don’t have big bucks to save. So this is a program that will allow someone, for example, to open up a savings account for as little as $25 and to regularly contribute as little as $5. They’ll be able to do that through payroll deduction. There will be tax benefits in the sense that the interest earned will accumulate tax free, although you’ll pay taxes on the initial contribution.
“Now, these vehicles will really be targeted to motivating people to save for retirement, although people can withdraw the money at any time. But if they do that, they’re going to be hit with a penalty and possibly taxes. Now, one disadvantage that some have noted is that the investments that these monies can go into will be limited, at least initially, to no risk government bonds.
“Now the advantage to that is there’s no risk. The disadvantage is right now these accounts pay a very, very low interest rate. Now, one question still has to be answered — one reason why banks and other financial institutions cannot offer these accounts is they’re very costly. The administrative costs are very high.
“And so one question is, how will that be handled? Who will pay those administrative costs? But other than that, this will be a vehicle hopefully that will motivate people who aren’t saving now to take a second look and save for retirement.”